Hello.
Please verify the solution to this question.
As per solution we should subtract a residual value of $50000. Should it be $150000?
Thank you,
Marina
Taylor Inc. leased a cutting and stuffing machine for its
furniture manufacturing plant effective April 1, 2014. The lease qualifies as a
finance lease and the asset has been set up on Taylor's balance sheet at the
value of $540,000. The term of the lease is 5 years and at the end of the lease
the machine will have a fair value of $150,000. The machine is expected to be
useful for 6 years. The lease allows Taylor to purchase the machine at the end
of the lease for $100,000. For machines used in manufacturing, Taylor uses
straight-line depreciation. Under IFRS, how much depreciation should Taylor
record for their year-ended December 31, 2014 for the machine?
Your answer is incorrect.
Per IAS 17.27, Leases, the depreciation policy for leased assets should be consistent with that for owned assets. Therefore, the straight-line depreciation method is acceptable. IAS 17.28 states that if there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset. Therefore, since there is a BPO because the purchase amount is less than the fair value at the end of the lease, there is reasonable certainty that Taylor will purchase the asset and therefore, the useful life should be used. As there is a residual value, this must be deducted from the carrying value before calculating depreciation as per IAS 16.53, Property, Plant and Equipment. Therefore, the depreciation charge for the year-ended December 31, 2014 would be calculated as ($540,000 - $50,000)/6 years x 9/12 (number of months remaining in year) = $61,250. Answer (1) is incorrect as it uses the lease term rather than the useful life and assumes the fair value at the end of the lease term to be its residual value. ($540,000 - $150,000)/5 years x 9/12 = $58,500. Answer (3) is incorrect as it does not include the residual value. $540,000/6 years x 9/12 = $67,500. Answer (4) is incorrect as it uses the lease term rather than the useful life and no residual value. $540,000/5 years x 9/12 = $81,000.
The correct answer is: 61250
